IRS at Work

IRS History

One of the first actions of any new nation is to collect taxes. This was true for the United States when in March of 1791, shortly after George Washington became president, the brand new Congress approved a law establishing a tariff system on selected imports and an internal excise tax on whiskey. In the next year, under the authority of that law, Treasury Secretary Alexander Hamilton established the Office of the Commissioner of Revenue, the predecessor to what is today the Internal Revenue Service.

Washington's tax shortly led to the new nation's first serious tax protest movement -- the Whiskey Rebellion of 1793-1795 that required the dispatch of a ragtag army of about 13,000 federalized state militiamen to suppress.

The Civil War, and the Union's insatiable demand for revenue, led to the re-creation of the Office of the Commissioner of Revenue, that by 1863 included about 4,000 tax collectors. Federal tax collections soared -- from $28.5 million the year before the war to more than $300 million towards its end. One measure helping swell the revenues was the establishment of the nation's first income tax which was sufficiently complex that eight years after Lincoln's assassination it was discovered that in 1864, the then-president had overpaid his taxes by $1,250.

The end of the civil war led to the end of that era's income tax. But in 1894, under heavy political pressure from the populists, Congress approved a modest new income tax. The Supreme Court immediately declared the tax unconstitutional. But broad political pressure for a more muscular federal government led to the ratification of the constitution's Sixteenth Amendment on February 13, 1913: "The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."

The creation of the Office of the Commissioner of Revenue in 1862, followed in 1913 by the permanent establishment of the income tax, are two of the three legs that support today's federal tax system. The third leg came in the middle of World War II when Congress approved a law requiring employees to withhold from salaries and wages the taxes owed by their employees.

Following the war, the IRS was engulfed in a massive corruption scandal that touched almost every level of the agency. After extensive Congressional hearings, the IRS underwent a basic re-organization while at the same time, installing what was then considered one of the most advanced computerized management systems in the world.

In the mid-1990s, the overall performance of the IRS -- particularly the way it dealt with individual taxpayers -- again became the subject of widespread public concern. The concern led to the formation of a special IRS study commission, a series of oversight hearing by the Senate Finance Committee and the passage by Congress of the IRS Restructuring and Reform Act of 1998. This law authorized a major spending program to improve the agency’s computers.

Just as significant was a basic change in the IRS’s structure. For many decades, the agency had been divided into scores of different districts along geographical lines. Most taxpayers -- individual, business, farm, corporation and tax exempt -- were processed by the districts where they were located. The 1998 law called for the elimination of this basic geographical system and its replacement by four functional units. In theory, one unit would deal with wage and investment returns filed by individual taxpayers, a second with the returns of small businesses and the self-employed, a third with those of large and mid-sized businesses and the fourth with tax exempt organizations.

In May of 2003, the Senate confirmed the nomination of Mark W. Everson as the 46th commissioner of the IRS. Everson, a Texas business executive who had held several senior positions in the Reagan and Bush Administrations, took over from Charles O. Rossotti.

Reflecting in part the changes that had occurred in the nation's economic and political situations, the initial vision of the two men about the role of IRS agency was quite different. Rossotti -- appointed in the wake of a series of sharply critical Senate hearings and in a boom period when budget deficits were melting -- had sought to lead the agency away from its heavy emphasis on enforcement to a more balanced policy where enforcement would be complemented with a systematic effort to make the IRS more hospitable to the taxpayer. The basic idea was that by if it was easier for taxpayers to meet their obligations, that voluntary compliance would significantly improve. Rossotti, however, also argued that enforcement must be an essential component of the government's tax collection strategy. Just before his 2002 retirement, for example, he said the government would need a massive increase in new employees -- 35,000 of them -- just to pursue the tax cases it was aware of.

Neither Congress, the outgoing Clinton team nor the Bush Administration were prepared to seriously consider Rossotti's warning. The dramatic decline in the nation's economy and the resulting surge in federal budget deficits, however, was a looming reality that demanded some kind of response. (The billions of additional dollars required for homeland security and the war in Iraq may have further contributed to the pressures on the IRS).

So, almost from the first day of Everson's five-year term, his official statements have reflected the belief that tougher enforcement was required to recover the "many billions of dollars of lost tax revenues." "We are correcting our course and re-centering the agency," he told an audience at the National Press Club on March 15, repeating earlier calls for action. The commissioner then outlined his priorities, starting with a a focused attack on the corporations and high income taxpayers who did not abide by the law.

As Everson's first year in office drew to a close, however, neither the Bush Administration who had appointed him nor Congress had so far seen fit to provide the IRS the substantial boost in financial resources that many experts -- in and out of the government -- believe the IRS must receive to effectively and fairly enforce the nation.

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